Sunday, 28 September 2014

Anthony Atkinson on the public debt and intergenerational equity

It's been a long time since my last post. Much of my spare time has been spent reading and thinking about the best way to think about the economy. In the end, I've come to the conclusion that it's the big picture that matters.

Take the question of the public debt. Much of the discussion in the popular press relating to the national debt focuses on the liabilities of the government and actuarial concerns (dealing with "how to pay it off"), but it rarely discusses the link between public debt and private wealth, wealth distribution and intergenerational equity.

Anthony Atkinson, I believe, summarized it best here:

Much of the rhetoric of fiscal consolidation is concerned with the national debt as a burden on future generations [...] One lesson of the public economics literature on the national debt is that we have to look at the full picture. We pass on to the next generations:

national debt,

state pension liabilities,

public financial assets,

public infrastructure and real wealth,

private wealth,

state of the environment, and

stocks of natural resources.

We need to look at the overall balance sheet, where assets as well as liabilities are taken into account. This does not mean that the position is a healthy one. If we consider the difference between the assets of the state and the national debt, expressed as a percentage of the total national wealth, then in the 1950s the net worth of the [UK] state was negative, but it was becoming less negative, and turned positive in the 1960s [...]The direction of change since the 1970s has however been in the wrong direction [...] In effect the process of privatisation, with the proceeds used largely to fund tax cuts, transferred wealth from the state to the personal sector. We saw that it was at the end of the 1970s that personal wealth began to rise faster than income. The worsening of the public balance sheet is the other side. Personal wealth has risen faster than national wealth since the 1970s because, in effect, assets have been transferred from the public to the private sector. We are passing on more privately to the next generation but less publicly.Reversing this pattern can be achieved not only by reducing the national debt, but also by increasing public assets.

Now, to say that more wealth is being passed on privately rather than publicly does not mean that it's being passed on equitably.

For instance, when the government sells-off public sector assets such as parks and decommissioned military bases, the government can use the proceeds to pay down the debt, but the assets get transferred to the purchasers of those assets in the private sector, who, most of the time, don't have the same class and socio-economic profile as that of the whole population (i.e., the former "owners" of those assets).

So here's the bottom line: paying down the debt by selling off public assets to the financial interests has contributed immensely to the wealth inequality that is being discussed these days.

And the corollary to this statement is that there's still lots of wealth "out there" that could be used for public purposes and has the potential to be passed on to future generation in a more equitable manner. It hasn't disappeared, it's just changed hands.

Reference

Atkinson, A.B., "Public economics in an age of austerity", January 12, 2012

(As an aside, it was not clear to me the Atkinson reference was in fact a book, as you give a very specific date.)

My view is that fiscal policy needs to be judged on short-term considerations, and the future will take care of itself. The configuration of real resources matters in the long term, but how things are funded etc. will be dealt with by future politicians. Since most working taxpayers will still be citizens in 30 years, I am unsure we can invoke "inter-generation" analysis.

Bringing in the big picture makes it even dicier. There's a strong argument from the peak oil analysts that we are configuring our entire infrastructure around the availability of cheap gasoline and diesel. A lot of private infrastructure will only be useful for scrap metal if diesel supplies tighten sufficiently. In which case, future generations will have a lot more serious complaints about the current generation than what we did with our pension plans.

Brian: Peak oil...you and my friend Joseph (Laliberté) are hammering on this point! I don't know enough to comment. I must admit, however, that I'm somewhat skeptical of any scenario that the future is fundamentally different from the present (except when it comes to policy decision; I think we are heading toward a time of exceptionally bad policy-making). Besides End of Growth, which I haven't read, do you have any suggestions for neophytes?

I agree with your view of fiscal policy. The only aspect I would emphasize is that short term considerations should include inequality. I believe full employment and some equity should dictate fiscal and monetary policy considerations (though I think full employment is a condition for achieving greater equality). I agree the rest will more or less take care of itself.

On the book issue...the quote is from an article, which I read a while ago. That first sentence was more of an update (not connected to the rest of the post, which was inspired by a post by Tom Hickey on Atkinson). Strangely, I can't find the URL for the website I found the article at. I have a paper copy, which I'm glad to have printed.

Peak Oil Books: Rubin's books are a translation of Peak Oil ideas into standard (market) economics. I don't agree with some of his economics, but he describes the technical issues of Peak Oil well. Another possibility is "The End Of Oil", by Paul Roberts. I did not read "The End of Oil", but I read his "The End of Food" (my kids were laughing at the trend of titles in books I read this summer), and it was excellent. Serious long-form journalism research, and not too sensationalistic. I have not read other books in the genre, but a lot of them seem fairly energy-deterministic when they talk about economics. But the key theme is that a lot of activity requires liquid fuels. For example, the electrical grid can only be realistically be maintained by diesel-powered heavy machinery. These dependencies will become a lot more apparent as liquid fuel prices rise.

I picked up a lot at The Oil Drum site (no longer publishing new stuff), and energy market analysis from when I watched the index-linked market. Of course, there's a fair amount of loopy stuff out there. "Official" sources (like the EIA) are OK, but the risk is that they are too optimistic. We will not find out until 15 years or so. News reports have been completely unreliable on the energy front - they just copy press releases from companies, and long-term energy needs have been "solved" dozens of times over just the past decade.

With regards to inequality, I see a lot of forces generating it. It would take quite a few changes to reverse the trend, even if there was a will to do so. A good dose of wage inflation would do the job, but that would be a hard sell politically, at least based on my reading of the political winds.

Not truly on topic, but Atkinson was one of the economists my postgrad supervisor most admired. (My thesis was on inequality and welfare state considerations, one of the areas in which AA has contributed a lot.)

Thanks for the encouraging words peterc! Not surprised you're familiar with AA. I've always thought of your work as a nice blend of different strands of econ. I like his writing style, too. Very few are able to make public economics as interesting.

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This website offers views and analysis on economic and social policymaking. It also seeks to dispel myths relating to public finance, as well as highlight some of the more interesting developments that should be of interest to policymakers. The approach is based on the work of economists of a circuitist/chartalist persuasion. The author is married and is the father of two great kids.